While it often helps to have strong end markets when trying to turnaround or improve operations, it isn't always a prerequisite. LSI Corporation (NYSE:LSI) management has done a pretty good job of reorienting this business towards better growth and margin, but key end markets like PCs and mobile carriers haven't been doing all that well of late. Consequently, LSI may yet be cheap enough for investors to see worthwhile gains from here if and when these markets improve.
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PC Recovery Looking Pretty Wimpy
It looks like the hopes that Microsoft's (Nasdaq:MSFT) introduction of Windows 8 and new chips from Intel (Nasdaq:INTC) would stimulate PC growth are evaporating. Not only did Intel warn that business is trending below expectation, but it looks like momentum among Chinese and Taiwanese vendors and suppliers ((outside of Lenovo (OTC:LNVGY)) is also waning.

That is a problem for LSI, given its position in storage products like HDD controllers. Likewise, there are some who seem to think that Marvell (Nasdaq:MRVL) is getting more aggressive in trying to win business from companies like Seagate (Nasdaq:STX) (a major LSI customer). So that sets up the potential for tougher battles within a weaker market.

SEE: A Primer On Investing In The Tech Industry

SSDs Becoming a Real Opportunity
Although the state of the PC business is definitely a concern in the here and now, don't sleep on what LSI is trying to become over time. In particular, LSI is leveraging its acquisition of SandForce to become a bigger player in SSD controllers, where it already seems to be the market share leader in consumer controllers. LSI also seems to be making some progress against Fusion-io (NYSE:FIO) in enterprise SSD by virtue of its lower prices.

This matters because of the growth potential of SSDs. Traditional hard drives are no longer a growth business, but ongoing share growth from solid state drives should power double-digit growth of SSDs and SSD controllers over the next decade. While LSI is probably going to surrender some share over that time, a slightly lower share of a much larger market suggests better days ahead for revenue growth.

Networking - Another Market with Iffy Near-Term Prospects
LSI also has a relatively significant business in communications/networking processors, where it competes with companies like Cavium (Nasdaq:CAVM) and Freescale (NYSE:FSL). The company recently introduced its Axxia product and has scored base station wins at major vendors Ericsson (Nasdaq:ERIC) and Nokia Siemens Network.

But here's the rub - the carrier spending environment (and it is carriers who buy those base stations) has been pretty tough this year, and though most industry participants and analysts believe a recovery is a "when, not if" event, they said that a year ago too. While Ericsson and Nokia Siemens seem to be relatively stronger today, at least in comparison to the likes of Alcatel-Lucent (NYSE:ALU), there have been many examples of networking companies showing a strong quarter or two only to see it reverse quickly. Consequently, while I think LSI has a good product in Axxia and a solid potential in this market, here too is a case where the near-term noise may be keeping some investors on the sidelines.

SEE: Earning Forecasts: A Primer

The Bottom Line
To be fair, the backwards-looking analysis of LSI is not all that impressive. Here is a company that has managed only 1% compound annual revenue growth over the last decade, while also losing book value at a double-digit annual clip. In other words, I understand why some investors may dismiss LSI as just another legacy semiconductor whose best days are well behind it.

I'm inclined toward a more optimistic assessment, though. I think the company's efforts to build businesses like SSD controllers, PCIe adapters and network processors can lead to above-average revenue growth and margin improvement over the next few years. LSI isn't necessarily a screaming buy today, but the company has been soundly topping expectations despite tough end markets. That tells me this is at least worth a look as an underrated growth recovery play.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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